Yesterday's trash-job in the stock market has bearish analysts telling anyone and everyone who will listen that this time it's different. This time, the bounce and the expected "V" bottom failed, we're told. This time, the technical damage is just too great. This time, there are huge divergences and narrow leadership. This time, global growth matters. And in sum, this time, the dip buyers aren't coming to save the day.

However, this appears to be an on-the-one-hand and yet, on-the-other-hand situation. Yes, it is true that yesterday's shellacking did not follow the script of the prior dips this year - where traders simply blindly bought after a handful of tough days. Yes, there was some serious technical damage done to the charts. And yet, it is important to recognize that from a longer-term perspective, things aren't remarkably different at this stage of the game.

It's the (Global) Economy...

Before turning to the charts, understand that the excuse du jour for yesterday's dance to the downside can be summed up in one word: growth. Or in this case, worries about a lack thereof.

Germany kicked things off with another miserable report from its manufacturing sector. After the report on Manufacturing Orders dove 5.7% on Monday, Tuesday's disaster of the day was Industrial Production, which as you might suspect by now, came in well below expectations. These two numbers were akin to an exclamation point to the thesis that Europe's economy in general and Germany's specifically, are in trouble.

Then came the IMF. Generally a master of restating the obvious, the IMF once again didn't disappoint as the group downgraded their forecasts for global economic growth. Sure, the forecast for the U.S. was actually taken up, however, it was the outlook for both Europe and China that got people's attention.

Next up came the Fed-heads. Minnesota's Narayana Kocherlakota said in a speech that it would be inappropriate for the FOMC to raise rates in the next two years. Never mind the fact that Kocherlakota is an uber-dove and that his call to keep rates low indefinitely is NOT new. No, what traders heard was concern about the state of the U.S. economy.

New York Fed President William Dudley also chimed in with similar sentiments, saying it is "premature" to raise interest rates. Ditto on the trading takeaway here.

Next, there was the report on Consumer Credit, which rarely if ever warrants any attention. However, with total credit coming in at $13.5 billion versus expectations for $21.0 billion, well, you get the idea.

And finally, there is the U.S. dollar. Word is that the spike in the greenback is going to threaten earnings, consumer spending, keep inflation from growing, yada, yada, yada. However, as the chart will show, it may be premature to panic over the dollar here.

Turning to the Charts

Ok, now that the reasons for the big dive are out of the way, let's turn our attention to the message from the charts.

First, there is the daily chart of the S&P 500. And while the area circled in red may not look like much, there is a lot going on here.

S&P 500 - Daily

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First, there is the break of the uptrend line that has been intact for many months. The bears tell us this is bad, very bad.

Next, there is the upside test of the 50-day moving average (orange), which also failed recently. Again, we are told this is not a positive.

Then there is the fact that the S&P 500 took out last week's closing low. Something that likely led to a fair amount of "technical" selling yesterday and, to hear the bears tell it, is a harbinger of bad things to come.

However, before you decide to double up on your short bets, let's consider that (a) the S&P is still above the all-important 150-day moving average, (b) the intraday low from last week has not been violated, and (c) the bulls contend that yesterday's hysterics merely represented a "retest" of the lows - something that is fairly typical during corrective phases.

For more, let's take a longer-term view.

S&P 500 - Daily

View Larger Image

The chart above shows the S&P 500 on a daily basis over the last 18 months or so. The red circles represent the 7, count them, 7 prior dips - as well as the current decline. The takeaway here is that, at least from a longer-term perspective, yesterday's thrashing doesn't appear to change the overall picture much. For example, while stocks are still in a short-term correction, the S&P has not violated its 150-day. As such, things do not appear to be dramatically different at this point.

The same short-term versus longer-term analysis can be applied to the freakout that is taking place in the dollar.

PowerShares US Dollar (UUP) - Daily

As the chart above clearly illustrates, the greenback has been surging since July and has put in an impressive run. However, when one steps back a bit and looks at the action in the dollar over a longer time horizon, the message changes.

PowerShares US Dollar (UUP) - Weekly

Viewed on a weekly basis over a multi-year time frame, one can argue that "King Dollar" has really just challenged the high end of the trading range that has been in place for more than three years. Thus, at a minimum, we would need to see a decisive break of this range in order to be able to argue that a new secular move in the dollar has begun.

Is It Really Different This Time?

So, those that argue that this time is different and stocks are due for a 2000/08-style beating, they may be right. However, it is important to remain objective in this type of situation and to realize that if the game is to change dramatically, there will need to be big changes on the longer-term charts as well. And so far at least, this is just not the case.

However, as we have been saying for quite some time, the risk of a meaningful decline in the stock market is indeed elevated and some caution is clearly warranted at this time.

Turning To This Morning

Although China's HSBC Services PMI for September came in at 53.5 versus 54.1 in August and European bourses remain weak this morning, things are looking up here at home. Perhaps it is the font-page editorial in the China Securities Journal calling for the PBoC to cut rates that has traders in a better mood. Or maybe it is the fact that the minutes from the latest Fed meeting are likely to be bullish. But in any event, U.S. stock futures are movin' on up and point to a rebound attempt at the open. It is also worth noting that oil is diving again this morning, which is a positive for U.S. consumers.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:
    Japan: -1.19%
    Hong Kong: -0.68%
    Shanghai: +0.81%
    London: -0.50%
    Germany: -0.76%
    France: -0.72%
    Italy: +0.40%
    Spain: -0.08%

Crude Oil Futures: -$0.84 to $88.01

Gold: +$5.20 at $1217.80

Dollar: lower against the yen, higher vs. euro and pound.

10-Year Bond Yield: Currently trading at 2.356%

Stock Indices in U.S. (relative to fair value):
    S&P 500: +3.60
    Dow Jones Industrial Average: +32
    NASDAQ Composite: +10.76

Thought For The Day:

When men speak of the future, the Gods laugh. -Chinese Proverbs

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Positions in securities mentioned: None

Wishing you green screens and all the best for a great day,

David D. Moenning
President, Chief Investment Officer
Heritage Capital Research
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